System and Method for a Risk Check

ABSTRACT

Various systems and methods are described herein for a risk check. The risk check bases a decision to allow a trading strategy to proceed on whether the order quantity for each leg of the trading strategy satisfies a certain condition. Particularly, when a trading strategy is initiated, the quantity for each of the orders to be submitted on behalf of the trading strategy, including the quantity of the initial order and any subsequent orders, is then compared to a corresponding risk value. If the order quantity for each of the orders is less than the corresponding risk value, then the trading strategy can proceed and the initial order can be sent on to the exchange. However, if the order quantity for any of the orders exceeds the risk value, then the initial order is not sent to the electronic exchange. Additionally, as described herein, quantity associated with the trading strategy is held or reserved for execution of the trading strategy regardless of the activity taken by the trader since the trading strategy was initiated. The reserved quantity can be drawn from the trading strategy until the quantity is depleted, the trading strategy has ended, or both, for example.

CROSS REFERENCE TO RELATED APPLICATIONS

The present application is a continuation of U.S. patent applicationSer. No. 17/534,263, filed Nov. 23, 2021, which is a continuation ofU.S. patent application Ser. No. 16/726,496, filed Dec. 24, 2019, nowU.S. Pat. No. 11,216,880, which is a continuation of U.S. patentapplication Ser. No. 14/030,047, filed Sep. 18, 2013, now U.S. Pat. No.10,572,938, which is a continuation of U.S. patent application Ser. No.12/410,210, filed Mar. 24, 2009, now U.S. Pat. No. 8,566,219, thecontents of each of which are fully incorporated herein by reference forall purposes.

FIELD OF INVENTION

The present invention is directed towards electronic trading. Moreparticularly, embodiments of the present invention are directed towardsa risk check.

BACKGROUND

An electronic trading system provides for electronically matching ordersto buy and sell items to be traded. The items may include, for example,stocks, options, and commodities. Typically, an electronic exchange inthe electronic trading system is used to match the orders. A match atthe exchange refers to either a full match of the order or a partialmatch of the order. In addition, the electronic exchange provides marketdata to various client devices in the electronic trading system used bytraders to place the orders. For example, the electronic exchange mayprovide market data such as prices for various items available fortrading and trade confirmations indicating what trades have occurred atwhat quantities and/or prices. An example of an electronic exchange isthe CME® Globex® electronic trading platform, which is offered by theChicago Mercantile Exchange (CME).

Users of electronic trading systems often employ risk managementtechniques to manage or limit the risk associated with electronictrading. However, current risk management techniques have disadvantagesthat may result in a number of unfavorable outcomes to the userincluding, for example, a complete failure of a trading strategy.Indeed, the current risk management techniques might actually causegreater risk in certain circumstances than a reduction in risk as theywere originally intended and designed.

SUMMARY

Embodiments described herein include a system, method, and computerreadable medium for risk check in electronic trading. As describedherein, a risk check system and method bases a decision to allow atrading strategy to proceed on whether the order quantity for each legof the trading strategy satisfies a certain condition. Particularly,when a trading strategy is initiated, the quantity for each of theorders to be submitted on behalf of the trading strategy, including thequantity of an initial order, is then compared to a corresponding riskvalue. If the order quantity for each of the orders is less than thecorresponding risk value, then the trading strategy can proceed and theinitial order can be sent to the exchange. However, if the orderquantity for any of the orders exceeds the corresponding risk value,then the initial order is not sent to the electronic exchange.Additionally, as described herein, quantity associated with the tradingstrategy is held or reserved for execution of the trading strategyregardless of the activity taken by the trader since the tradingstrategy was initiated. This reserved quantity can be drawn from thetrading strategy until the quantity is depleted, the trading strategyhas ended, or both, for example.

For example, a method for risk check includes identifying a first orderquantity corresponding to a first order and a second order quantitycorresponding to a second order, where the first order and the secondorder are part of a trading strategy. According to the trading strategy,the second order is placed at a second electronic exchange subsequent todetection of a match of the first order at a first electronic exchange.The first order quantity is compared to a first risk value and thesecond order quantity is compared to a second risk value. An indicationis generated when the first order quantity does not exceed the firstrisk value and when the second order quantity does not exceed the secondrisk value. The first order is sent on to the exchange responsive to theindication. However, the example method may also include generating asecond type of indication when the first order quantity exceeds thefirst risk value, the second order quantity exceeds the second riskvalue, or both occur. The first order is not sent to the electronicexchange responsive to the second type of indication.

In another example, a system for risk check includes a quantityidentification component and a risk check analyzer component. Thequantity identification component is configured to identify a firstorder quantity corresponding to a first order and a second orderquantity corresponding to a second order, where the first order and thesecond order are part of a trading strategy. According to the tradingstrategy, the second order is placed at a second electronic exchangesubsequent to detection of a match of the first order at a firstelectronic exchange. The risk check analyzer component is configured tocompare the first order quantity to a first risk value and the secondorder quantity to a second risk value. The risk check analyzer componentprovides an indication when the first order quantity does not exceed thefirst risk value and when the second order quantity does not exceed thesecond risk value. The first order may be sent on to the exchangeresponsive to the indication. However, the risk check analyzer componentmay also provide a second type of indication when the first orderquantity exceeds the first risk value, the second order quantity exceedsthe second risk value, or both occur. The first order is not sent to theelectronic exchange responsive to the second type of indication.

Many advantages, features, and characteristics of the present inventionwill become apparent from the following detailed description of thevarious example embodiments and accompanying drawings, all of which forma part of this specification.

BRIEF DESCRIPTION OF THE DRAWINGS

Example embodiments are described herein with reference to the followingdrawings.

FIG. 1 illustrates a flowchart of a method for trading in an electronictrading environment using a risk check according to certain embodimentsof the present invention; and

FIG. 2 illustrates an example electronic trading system in which certainembodiments of the present invention may be employed.

The foregoing will be better understood when read in conjunction withthe drawings which show certain embodiments of the present invention.The drawings are for the purpose of illustrating certain embodiments,but it is understood that the present invention is not limited to thearrangements and instrumentality shown in the drawings.

DETAILED DESCRIPTION

Embodiments described herein provide for a risk check for use inelectronic trading. The risk check bases a decision to allow a tradingstrategy to proceed on whether the order quantity for each leg of thetrading strategy satisfies a certain condition. For instance, when atrading strategy is initiated, the quantity for each of the orders to besubmitted on behalf of the trading strategy, including the quantity ofan initial order and any subsequent orders, is then compared to acorresponding risk value(s). If the order quantity for each of theorders is less than the corresponding risk value (or, for example, theorder quantity satisfies a condition based on the risk value), then thetrading strategy can proceed and the initial order can be sent on to theelectronic exchange. However, if the order quantity for any of theorders exceeds the risk value, then the initial order is not sent on tothe electronic exchange.

Additionally, as described herein, order quantity associated with thetrading strategy is held or reserved for execution by the tradingstrategy regardless of the activity taken by the trader since thetrading strategy was approved and/or initiated. This reserved quantitycan be drawn from the trading strategy until the order quantity isdepleted, the trading strategy has ended, or both, for example. Quantitythat is not used by the end of the trading strategy may then be used byother strategies.

As used herein, a “tradeable object” refers to anything that can betraded with a price, a quantity, or both price and quantity. Forexample, financial products such as stocks, options, bonds, futures,currency, warrants, funds derivatives, commodities, and collectionsand/or combinations of these may be tradeable objects. A tradeableobject may be “real” or “synthetic.” A real tradeable object includesproducts that are listed by an exchange. A synthetic tradeable objectincludes products that are defined by the user and are not listed by anexchange. For example, a synthetic tradeable object may include acombination of real (or other synthetic) products such as a syntheticspread. A tradeable object may also include traded events or goods, forexample.

I. RISK CHECK

FIG. 1 illustrates a sample flowchart 100 of a method for trading in anelectronic trading environment using a risk check according to certainembodiments.

At block 102, a definition for a trading strategy is received and/oridentified. A definition for a trading strategy, for example, representsa predefined set of rules for making trading decisions. It is understoodthat the risk check is not limited to a particular trading strategy, andthat the trading strategies used herein are meant to illustrate variousembodiments of risk check. For example, a trading strategy might involveplacing at least one order at an electronic exchange, and thenoffsetting a fill (e.g., either a complete or partial fill) of thatorder with the placement of one or more subsequent orders in one or moretradeable objects. In another example, a trading strategy might involvebuying or selling a first tradeable object and selling or buying asecond tradeable object, where the first tradeable object is differentfrom the second tradeable object. In yet another example, a tradingstrategy might involve buying or selling three or more tradeableobjects. In another example, a trading strategy might involve buying andselling the same tradeable object. Regardless of the trading strategy,each tradeable object of the trading strategy may be referred to hereinas a “leg” of the trading strategy.

At block 104, a buy or sell order quantity for each leg of the tradingstrategy is received and/or identified. It is also understood that therisk check is not limited to how the order quantities for each leg arecalculated, and that the calculations used herein are meant toillustrate various embodiments of risk check. For example, the buy orsell order quantity for a leg might be electronically calculated basedon a desired quantity for the trading strategy. In another example, thebuy or sell order quantity for a leg is directly input into a computingdevice by a user. Additionally, the buy or sell order quantity for eachleg may represent order quantity for more than a single order to beplaced in a leg. Also, the buy or sell order quantity may representorder quantity for an order to be quoted, and/or the buy or sell orderquantity represents order quantity for an offset or hedge order. Incertain embodiments, the order quantity for each leg is stored in acomputer data structure. Regardless of how or where the first orderquantity is calculated, certain embodiments per block 104 receive and/oridentify the buy or sell order quantity value for each leg of thetrading strategy.

For example, if a trading strategy includes buying “10” of leg 1 andselling “15” of leg 2, then the buy order quantity identified for leg 1is “10” and the sell order quantity identified for leg 2 is “15,”according to block 104. These values could be received and/or identifiedby the risk check by getting the values from a computing deviceconfigured to compute them or by reading a data structure with thevalues stored therein, for example.

At block 106, a comparison is made between the buy or sell orderquantity values for each leg of the trading strategy and a correspondingrisk value(s) for each corresponding leg. In certain embodiments, a riskvalue for each leg is calculated based on various inputs, including oneor more user defined values. For example, the risk value may becalculated based on a “maximum position” taken in a particular leg, a“maximum order quantity” for an order to be placed in a particular leg,or both, where the “maximum position” and “maximum order quantity” for aparticular leg represent values that are pre-configured by a trader orrisk administrator, for example. Consequently, if more than one riskvalue is calculated (e.g., if the order quantity is compared to both amaximum position and a maximum order quantity), then the buy or sellorder quantity value may be compared to each of the risk values.However, if a plurality of risk values is computed, it may be possibleto combine them into a single risk value for comparison. The followingformulas may be used to calculate one or more risk values based onconditions existing at a current time and various user inputs.

For a Sell Order in a Leg:

-   -   Risk Value 1=Maximum position in the leg+Current position in the        leg−Quantity of all working sell orders in the leg, where the        maximum position is a positive value and current position is a        positive value if long (bought) or a negative value if short        (sold);    -   Risk Value 2=Maximum order quantity for the leg.

For a Buy Order in a Leg:

-   -   Risk Value 3=Maximum position in the leg−Current position in the        leg−Quantity of all working buy orders in the leg, where the        maximum position is a positive value and current position is a        positive value if long (bought) or a negative value if        short(sold); and    -   Risk Value 4=Maximum order quantity for the leg.

Using the example formulas above, assume the following is computed forleg 1, which is to be bought based on the trading strategy, at aninstant in time when determining whether to approve the tradingstrategy:

-   -   Risk Value 3=25; and    -   Risk Value 4=15.

Also, assume the following is computed for leg 2, which is to be soldbased on the trading strategy, at an instant in time when determiningwhether to approve the trading strategy:

-   -   Risk Value 1=20; and    -   Risk Value 2=15.

Consequently, the buy order quantity in leg 1 cannot exceed the riskvalue of “15” (given that “15” is less than “25”). Similarly, the sellorder quantity in leg 2 cannot exceed the risk value of “15” (given that“15” is less than “20”). According to this example, the trading strategywould be approved to proceed, because the trading strategy calls forbuying “10” of leg 1, and selling “15” of leg 2, which are both lessthan or equal to their corresponding risk values.

At block 108, the trading strategy is “approved” when each of the orderquantity values is determined to be less than the corresponding riskvalue(s) (or, each of the order quantities satisfy a condition based onthe risk value). Thus, the first order of the trading strategy may beplaced in the exchange order book at the electronic exchange. Then,other orders can also be placed with no risk, or substantially no risk,of being rejected due to the approved risk check. In certainembodiments, the trading strategy is approved so that all orders relatedto the trading strategy can be placed at one time or another to executethe trading strategy. In certain embodiments, a quantity amount equal toor nearly equal to the quantity value for each leg is held or reservedfor the trading strategy and not other trading strategies. In certainembodiments, the quantity amount equal to or nearly equal to the secondorder quantity is held for the trading strategy and not other tradingstrategies. In certain embodiments, the reserved quantity cannot be usedto execute other trading strategies.

Using the above example, when the trading strategy is approved, thesystem will adjust both the current positions in legs 1 and 2 to accountfor the working buy order in leg 1 and the subsequent working sell orderin leg 2. As such, the order quantity for the trading strategy is“reserved,” in that subsequent trading strategies cannot also lean onquantity reserved for this trading strategy.

At block 110, the trading strategy is not approved when the orderquantity value is determined to exceed the risk value(s) (or, each ofthe order quantities does not satisfy a condition based on the riskvalue). Thus, the first order is rejected. In other words, the firstorder is not currently placed at the electronic exchange. In certainembodiments, all orders for the trading strategy including the firstorder cannot be placed at the exchange. In alternate embodiments, if afirst order was already placed and the trading strategy is not approved,then the first order and any other orders related to the tradingstrategy are deleted from the exchange.

In some embodiments, the system may be configured such that if an orderquantity exceeds a risk value, then the order quantity is reduced to anacceptable level (e.g., so as not to exceed the risk value). The amountthe order quantity is reduced may be determined by a user allowing acertain percentage reduction in the order quantity. This may affect theoutcome of the trading strategy by reducing the overall amount that isbought or sold of the trading strategy. For example, assume a traderwishes to buy “5” of a spread between leg 1 and leg 2, with a 1:1 spreadratio (in certain embodiments, a spread ratio may be used to determinethe number of leg contracts that are traded per one lot spread order).In other words, the trader wishes to buy “5” of the spread, whichtranslates to buying “5” of leg 1 and selling “5” of leg 2. If thesystem determines that the order quantity in leg 1 exceeds the riskvalue by “2,” then the system can adjust the trading strategy to buy “3”of the spread versus the original “5.” Thus, the new spread would buy“3” of leg 1 and sell “3” of leg 2—which satisfies the correspondingrisk values for each leg. However, if the trader does not want toimplement the spread if the quantity reduction results in buying 10%less of the spread than originally desired, for example, then the systemwould reject the strategy instead of modifying it, because buying only“3” of the spread is greater than a 10% quantity reduction of “5.” Also,in some embodiments, the system will notify the trader before thetrading strategy is changed, provide details on a possible modification,and then wait for confirmation to proceed to modify the tradingstrategy. In other embodiments, the modification is automatic.

II. AN EXAMPLE ELECTRONIC TRADING SYSTEM

FIG. 2 illustrates an example electronic trading system 200 in whichcertain embodiments may be employed. The system 200 includes clientdevice 202, gateway device 204, server side automation device (“SSA”)206, server side risk (“SSR”) 208, and electronic exchange 210.According to this example, client device 202 is in communication withgateway 204. Gateway 204 is in communication with electronic exchange210. SSA 206 may be in communication with client device 202 and gateway204. SSR 208 may be in communication with any of client device 202, SSA206, and gateway 204.

According to some operations, client device 202 is adapted to sendorders to buy or sell tradeable objects at exchange 208. Orders to beplaced at exchange 210 via client device 202 are sent through gateway204. In addition, market data may be sent from exchange 210 to clientdevice 202 via gateway 204. Market data may be monitored via clientdevice 202 and a user can base decisions to send trade orders toexchange 210 for one or more tradeable objects. Trading decisions atclient device 202 may be manual or automated. In some embodiments,orders placed via the client device 202 are risk checked utilizing thetechniques described herein. For instance, orders to be placed viaclient device 202 are risk checked so that position and/or order sizelimits for each leg of a trading strategy will not be exceeded.

According to some operations, SSA 206 is adapted to send orders to buyor sell tradeable objects at exchange 210 on behalf of the user ofclient device 202. Orders to be placed at exchange 210 via SSA 206 aresent through gateway 204. Market data may be sent from exchange 210 toSSA 206 via gateway 204. SSA 206 may monitor the market data and basedecisions to send an order for a tradeable object. Trading decisions atSSA 206 are generally automated, but it may be adapted for manualintervention by user of client device 202, for example. In certainembodiments, orders placed via SSA 206 are risk checked utilizing thetechniques described herein. For instance, orders to be placed via SSA206 are risk checked so that position and/or order size limits for eachleg of a trading strategy will not be exceeded.

Client device 202 may include one or more electronic computing platformssuch as a hand-held device, laptop, personal computer, workstation witha single or multi-core processor, server with multiple processors,and/or cluster of computers, for example. A present day commercialexample might include a computing device that utilizes the Windows XPProfessional operating system and has at least 2 GB of memory, twodual-core or two quad-core processors, a network card, and at least 10GB of hard drive space to accommodate software. Client device 202 maycommunicate with the trading network using a local area network, a widearea network, a virtual private network, a T1 line, a T3 line, apoint-of-presence, and/or the Internet, for example.

Client device 202 may be configured to run one or more tradingapplications. The trading application(s) may, for example, processmarket data by arranging and displaying the market data in trading andcharting windows on a display screen. This processing may be based onuser preferences, for example. In addition to manual style tradingtools, the trading application(s) may include an automated trading toolsuch as an automated spread trading tool, for example. In anotherexample, client device 202 may be a computing system running a copy ofX_TRADER™, an electronic trading platform provided by TradingTechnologies International, Inc. of Chicago, Illinois. Regardless of thetype of trading application, client device 202 may be adapted to sendorders to buy and sell tradeable objects listed at exchange 210. Clientdevice 202 may also be adapted to cancel orders, change orders, and/orquery exchange 210, for example. Client device 202, including the one ormore trading applications, may also be configured to operate with one ormore trading applications at SSA 206, more of which is described below.

Client device 202 may include a user interface. The user interface mayinclude one or more display devices for presenting a text-based orgraphical interface to a user, for example. Display devices may includecomputer monitors, hand-held device displays, projectors, and/ortelevisions. The user interface may be used by the user to specify orreview parameters for an order using a trading application. The userinterface may include one or more input devices for receiving input froma user. For example, the input devices may include a keyboard,trackball, two or three-button mouse, and/or touch screen. The userinterface may include other devices for interacting with a user. Forexample, information may be aurally provided to a user through a speakerand/or received through a microphone.

In some embodiments, client device 202 includes a risk check analyzercomponent to perform block 106 in FIG. 1 , for example, to determinewhether a trading strategy is approved. Client device 202 may beconfigured to perform other blocks in FIG. 1 in addition to block 106,for example. Client device 202 and SSR 208 may also be configured toshare responsibility to perform a risk check. In other embodiments,client device 202 is not utilized to perform a risk check, but someother computing device like SSR 208 is configured to perform the riskcheck (e.g., SSR 208 includes a quantity identification component perblock 104 and a risk check analyzer per block 106).

Server side automation (“SSA”) 206 may include one or more electroniccomputing platforms such as a personal computer, workstation with asingle or multi-core processor, server with multiple processors, and/orcluster of computers, for example. A present day commercial examplemight include a computing device that utilizes the Windows 2003 Server(Server Pack 2) operating system and has at least 4 GB of memory, twodual-core or two quad-core processors, two or more network cards with atleast one pointed to the internal network and one pointed to theexchange, and at least 30 GB of hard drive space to accommodatesoftware. SSA 206 may be used to implement automated or semi-automatedtrading programs. Orders may be sent directly from SSA 206 to exchange210 through gateway 204. Orders may also be sent from another computerdevice to exchange 210 via instructions from SSA 206, for example.

Server side risk (“SSR”) 208 may include one or more electroniccomputing platforms such as a personal computer, workstation with asingle or multi-core processor, server with multiple processors, and/orcluster of computers, for example. A present day commercial examplemight include a computing device that utilizes the Windows 2003 Server(Server Pack 2) operating system and has at least 4 GB of memory, twodual-core or two quad-core processors, two or more network cards with atleast one pointed to the internal network and one pointed to theexchange, and at least 30 GB of hard drive space to accommodatesoftware.

In some embodiments, SSR 208 includes a risk check analyzer component toperform block 106 in FIG. 1 , for example, to determine whether atrading strategy is approved. SSR 208 may include a quantityidentification component to receive and/or identify an order quantity tobe bought or sold in each leg of a trading strategy. When used, SSR 208can notify client device 202 and/or SSA 206 whether to proceed with aparticular trading strategy. In certain embodiments, SSR 208 performsother steps in FIG. 1 in addition to blocks 104 and 106, for example. Insome embodiments, client device 202 and/or SSA 206 and SSR 208 shareresponsibility to perform a risk check. In other embodiments, SSR 208 isnot utilized, but some other computing device like client device 202 orgateway 204 is configured to perform a risk check utilizing thetechniques described herein.

Gateway 204 may include one or more electronic computing platforms suchas a personal computer, workstation with a single or multi-coreprocessor, server with multiple processors, and/or cluster of computers,for example. In certain embodiments, gateway 204 communicates withclient device 202 and/or SSA 206 and/or SSR 208 using a local areanetwork, a wide area network, a virtual private network, a T1 line, a T3line, a point-of-presence, and/or the Internet, for example. A presentday commercial example might include a computing device that utilizesthe Windows 2003 Server (Server Pack 2) operating system and has atleast 4 GB of memory, two dual-core or two quad-core processors, two ormore network cards with at least one pointed to the internal network andone pointed to the exchange, and at least 30 GB of hard drive space toaccommodate software.

Gateway 204 is adapted to communicate with client device 202 and/or SSA206 and/or SSR 208 and exchange 210. Gateway 204 facilitatescommunication between the various devices on the trading network andexchange 210. For example, gateway 204 may receive orders from clientdevice 202 and/or SSA 206 and transmit the orders to exchange 210. Asanother example, gateway 204 may receive market data from exchange 210and transmit the market data to client device 202 and/or SSA 206. Aspreviously discussed, gateway 204 may also be configured to implementcertain embodiments of the present invention.

Particularly, gateway 204 may be configured to process data communicatedbetween client device 202 and/or SSA 206 and exchange 210. For example,gateway 204 may process an order received from client device 202 and/orSSA 206 into a data format acceptable by exchange 210. Similarly,gateway 204 may transform market data in an exchange-specific formatreceived from exchange 210 into a format understood by client device 202and/or SSA 206. The processing of gateway 204 may also include trackingorders from client device 202 and/or SSA 206 and updating the status ofthe order based on fill confirmations received from exchange 210, forexample. As another example, gateway 204 may coalesce market data fromexchange 210 and provide it to client device 202 and/or SSA 206.

Exchange 210 is adapted to match orders to buy and sell tradeableobjects. The tradeable objects may be listed for trading at exchange210. The orders may include orders received from client device 202and/or SSA 206, for example. Orders may be received from client device202 and/or SSA 206 through gateway 204, for example. In addition, theorders may be received from other devices in communication with exchange210. That is, typically exchange 210 will be in communication with avariety of other client devices (which may be similar to client device202) or other computing devices that also provide orders to be matched.An example of exchange 210 is an electronic trading platform offered byCME Group, located in Chicago, Illinois.

Exchange 210 is adapted to provide market data. The market data may beprovided to the client device 202 and/or SSA 206, for example. Themarket data may be provided to the client device 202 and/or SSA 206through gateway 204, for example. The market data may include data thatrepresents the inside market, for example. The inside market is thelowest sell price (also referred to as the “best ask”) and the highestbuy price (also referred to as the “best bid”) at a particular point intime. The market data may also include market depth. Market depth refersto the quantities available at other prices away from the inside market.In certain embodiments, market depth is provided for all price levels.In certain embodiments, market depth is provided for less than all pricelevels. For example, market depth may be provided only for the firstfive price levels on either side of the inside market. The market datamay also include information such as the last traded price (LTP), thelast traded quantity (LTQ), and order fill information.

In certain embodiments, system 200 includes more than one client device202. For example, multiple client devices similar to the client device202, discussed above, may be in communication with gateway 204 to sendorders to the exchange 210.

In certain embodiments, system 200 includes more than one gateway 204.For example, multiple gateways similar to the gateway 204, discussedabove, may be in communication with the client device 202 and/or SSA 206and the exchange 204. Such an arrangement may be used to provideredundancy should gateway 204 fail, for example. System 200 might alsoinclude additional gateways to facilitate communication between clientdevice 202 and/or SSA 206 and other exchanges besides exchange 210.

In certain embodiments, system 200 includes more than one exchange 210.For example, the gateway 204 may be in communication with multipleexchanges similar to the exchange 210, discussed above. Such anarrangement may allow client device 202 and/or SSA 206 to trade at morethan one exchange through gateway 204, for example.

In certain embodiments, gateway 204 is part of client device 202 and/orSSA 206. For example, the components of gateway 204 may be part of thesame computing platform as the client device 202 and/or SSA 206. Asanother example, the functionality of gateway 204 may be performed bycomponents of the client device 202 and/or SSA 206. In certainembodiments, gateway 204 is not present. Such an arrangement may occurwhen the client device 202 and/or SSA 206 does not need to utilizegateway 204 to communicate with exchange 210, for example. For example,if client device 202 and/or SSA 206 have been adapted to communicatedirectly with exchange 210.

In certain embodiments, any of gateway 204, SSA 206, and SSR 208 isphysically located at the same site as the client device 202. In certainembodiments, any of gateway 204, SSA 206, and SSR 208 is physicallylocated at the same site as exchange 210. In certain embodiments, clientdevice 202 is physically located at the same site as the exchange 210.In certain embodiments, any of gateway 204, SSA 206, and SSR 208 isphysically located at a site separate from both the client device 202and the exchange 210.

While not shown for the sake of clarity, in certain embodiments, system200 may include other devices that are specific to the communicationsarchitecture such as middleware, firewalls, hubs, switches, routers,exchange-specific communication equipment, modems, security managers,and/or encryption/decryption devices.

In certain embodiments, when at least one order is rejected due to arisk check, a message or indication is provided. In certain embodiments,no message is provided except that the trading strategy fails toproceed. In certain embodiments, when at the trading strategy isapproved, another message or indication is provided. For example, a riskcheck analyzer component may be configured to provide such messagesand/or indications.

In certain embodiments, the trading strategy can be modified duringexecution. For example, the price, quantity, or both can be changed foran active trading strategy. Upon increasing the quantity of a workingspread order, for example, a risk check is performed similar to asdiscussed above. If the proposed change passes the risk check, thetrading strategy can be modified by adjusting order quantity in one ormore tradeable objects. If the proposed change fails the risk check,then the trading strategy cannot be modified, for example.

III. FIRST EXAMPLE

In operation, a trader might define a trading strategy that involvesplacing at least two orders in a single market or multiple markets. Incertain embodiments, the trading strategy is a spread trading strategy,in which a quoting order is placed for a tradeable object and a hedgeorder is placed for a tradeable object when the quoting order is filled.In other words, a quoting order is sent to a leg of the spread to work abid or offer to achieve the desired spread price. When the quoting orderis filled, an offsetting hedge order is sent to another leg to completethe spread at the desired spread price. Certain embodiments includestoring the definition at client device 202 in FIG. 2 , for example. Incertain embodiments, the trading strategy definition is stored at SSA206, for example. In certain embodiments, the definition is stored atexchange 210. The definition might also be stored at a variety ofdifferent computing devices.

A trader may utilize a trading tool to trade according to a tradingstrategy. For example, the trading tool, Autospreader™ provided byTrading Technologies International, Inc. of Chicago, Illinois, providesa software tool for trading spreads. Autospreader also provides amechanism for defining the trading strategy. Defining a spread strategyusing Autospreader may include entering a spread ratio, spreadmultiplier, tolerance parameters (e.g., slop), and other parameters.Components of a tool like Autospreader tool may be implemented at clientdevice 202, SSA 206, or a combination of client device 202 and SSA 206,for example.

For example, assume that a trader configures a two-legged spread. Thatis, the spread is between two tradeable objects, and each tradeableobject represents one leg of the spread. Assume also that a spread ratiois set to be 1-to-1. In certain embodiments, a spread ratio may be usedto determine the number of leg contracts that are traded per one lotspread order. The trader also wishes to quote in only one leg of thespread. With the trading strategy defined, the trader may begininitiating orders.

In certain embodiments, the trader may enter a spread order, whichincludes a spread price (referred to as a desired spread price) and aspread quantity. Responsively, a tool like Autospreader computes anorder quantity to quote. The order quantity to be hedged may also becomputed using the spread ratio and quoting order quantity.

In certain embodiments, the quantity to be quoted and the quantity to behedged are risk checked to determine whether to allow the tradingstrategy to proceed by placing the quoting order at exchange 210.Particularly, the risk check identifies the quantity to be quoted andthe quantity to be hedged and compares the order quantity value in eachleg to a corresponding risk value. If each of the quantity values isequal to or less than the corresponding value, then the trading strategycan proceed and the quoting order is sent to the exchange. When thequoting order is filled, the hedge order can be sent without the risk(or substantially reduced risk) of being rejected by a risk check.However, if any of the order quantity values exceeds the risk value,then the quoting order is refrained from being sent to the electronicexchange. As discussed above, steps taken and/or components of the riskcheck might be implemented at client device 202, SSR 208, both clientdevice 202 and SSR 208, some other computing device, or a combination ofvarious computing devices.

By risk checking the quoting order and the hedge order, certainembodiments of the present invention may prevent or eliminate thefailure of the trading strategy. In other words, the whole tradingstrategy is pre-approved by the risk check and the orders for thetrading strategy will not have to undergo another risk check during thecourse of executing the trading strategy, thereby reducing oreliminating risk of failure of the strategy (e.g., getting legged up inthe second leg because of a failed risk check). Additionally, unlike ina conventional system, the hedge order can be submitted to theelectronic exchange without undergoing a risk check, thereby reducingthe time it takes for the hedge order to reach the exchange.

In certain embodiments, when a particular quantity is approved by therisk check, the trader is prevented from using a quantity or taking aposition equal to the approved quantity for use in a different tradingstrategy. That way, when the trading strategy is ready to submit thehedge order, it can do so without fear of rejection, because the hedgeorder quantity was risk checked and accounted for, regardless of theactivity taken by the trader since the trading strategy was initiated.Quantity that is not used by the end of the trading strategy may then beused by other strategies.

IV. SECOND EXAMPLE

For example, assume that a trader configures the same two-legged spreadas above. However, this time the trader wishes to quote both legs of thespread. With the trading strategy defined, the trader may begininitiating orders.

In certain embodiments, the trader may enter a spread order, whichincludes a spread price (referred to as a desired spread price) and aspread quantity. Responsively, a tool like Autospreader computes anorder quantity to quote each leg of the spread. The order quantity to behedged in each leg may also be computed using the spread ratio andquoting order quantity. Accordingly, this trading strategy involves twoquoting orders and two offsetting hedge orders.

In certain embodiments, the risk check identifies the quantity to bequoted in both legs and the quantity to be hedged in both legs andcompares the potential buy and sell quantities in each leg to acorresponding risk value. Similar to the example above, if each of theorder quantity is less than the risk value, then trading strategy canproceed and the quoting order is sent to the exchange. When the quotingorders are filled, the hedge orders can be sent without the risk ofbeing rejected by a risk check. However, if any of the order quantitiesexceeds the check value, then the quoting orders are not sent to theelectronic exchange.

In certain embodiments, when a spread order is entered, usingAutospreader or some other trading tool, all potential outright orders,including all quoting and all possible hedge orders are risk checkedprior to any orders being submitted into the market. If any of thepotential orders fails the risk check, then no orders will be placed andthe whole trading strategy is rejected.

In certain embodiments, multiple orders may be submitted in place of asingle quoting order or a single hedge order. Accordingly, the quantityfor all of the orders is totaled. Then, the total quantity is comparedwith a position risk check parameter, such as discussed above.

V. THIRD EXAMPLE

As another example of certain embodiments, assume that a traderconfigures the same two-legged spread as the first example above. Withthe trading strategy defined, the trader places the first order (withapproval from risk check).

While the first order is pending, the risk check is performed on thetrading strategy. In certain embodiments, the method of FIG. 1 isperformed. If it determined that the trading strategy is not approved,then the first order is deleted from the exchange. If it is determinedthat the trading strategy is approved, then the trading strategy cancontinue.

VI. CONCLUSION

Embodiments described herein provide for a risk check. The risk checksystem, method, and computer readable medium bases a decision to allow atrading strategy to proceed on whether the order quantity for each legof the trading strategy satisfies a certain condition. Particularly,when a trading strategy is initiated, the risk check compares thepotential order quantity of each leg to a corresponding risk value. Ifeach of the order quantities is less than the corresponding risk value,then trading strategy can proceed and the order is sent to the exchange.However, if the order quantity for any of the orders exceeds thecorresponding risk value, then the initial order is not sent to theelectronic exchange. As such, the risk of failure of a trading strategydue to an inability to submit subsequent orders as result of thoseorders getting rejected by a risk system is minimized, if not reducedentirely, by the embodiments described herein. Additionally, the hedgeorder can be submitted to the electronic exchange without undergoing arisk check, thereby reducing the time it takes for the hedge order toreach the exchange.

Additionally, quantity associated with the trading strategy may be heldfor execution of the trading strategy regardless of the activity takenby the trader since the trading strategy was initiated. This heldquantity can be drawn from by the trading strategy until the quantity isgone, the trading strategy has ended, or both.

One or more of the steps of the method(s) discussed above may beimplemented alone or in combination in various forms in hardware,firmware, and/or as a set of instructions in software, for example.Certain embodiments, including a method, may be provided as a set ofinstructions residing on a computer-readable medium, such as a memory,hard disk, CD-ROM, DVD, and/or EPROM, for execution on a general purposecomputer or other processing device.

Certain embodiments of the present invention may omit one or more ofthese steps and/or perform the steps in a different order than the orderlisted. For example, some steps may not be performed in certainembodiments of the present invention. As a further example, certainsteps may be performed in a different temporal order, includingsimultaneously, than listed above.

While the invention has been described with reference to certainembodiments, it will be understood by those skilled in the art thatvarious changes may be made and equivalents may be substituted withoutdeparting from the scope of the invention. In addition, manymodifications may be made to adapt a particular situation or material tothe teachings of the invention without departing from its scope.Therefore, it is intended that the invention not be limited to theparticular embodiment disclosed, but that the invention will include allembodiments falling within the scope of the appended claims.

1. (canceled)
 2. A computer readable medium having stored thereininstructions executable by a processor, including instructionsexecutable to: receive, by a server side device, a trading strategydefinition for a trading strategy that includes a first quantity for afirst tradeable object and a second quantity for a second tradeableobject, wherein the trading strategy is associated with a position riskvalue; determine, by the server side device, a first risk value and asecond risk value, wherein the first risk value is associated with thefirst tradeable object, and the second risk value associated with thesecond tradeable object; compare, by the server side device, acombination of the first and second risk values to the position riskvalue associated with the trading strategy; define, by the server sidedevice when the first and second risk values are less than the positionrisk value, an execution reserve quantity equal to the combination ofthe first and second risk values; submit, by the server side device, afirst order to a first electronic exchange when the combination of thefirst and second risk values are less than the position risk value,wherein the first order is associated with the first tradeable object;receive, by the server side device, a fill confirmation associated withthe first order and updating the execution reserve quantity based on afilled quantity in the fill confirmation; and submit in response toreceiving the fill confirmation, a second order to a second electronicexchange, wherein the second order is associated with the secondtradeable object.
 3. The computer readable medium of claim 2, whereinthe first tradeable object is different than the second tradeableobject.
 4. The computer readable medium of claim 2, wherein the firsttradeable object is the same as the second tradeable object.
 5. Thecomputer readable medium of claim 2, wherein the first electronicexchange is different than the second electronic exchange.
 6. Thecomputer readable medium of claim 2, wherein the position risk valueassociated with the trading strategy is based on at least any one of thefollowing: a trader pre-configured first maximum position for the firsttradeable object; a trader pre-configured first maximum order quantityfor the first tradeable object; a trader pre-configured second maximumposition for the second tradeable object; and a trader pre-configuredsecond maximum order quantity for the second tradeable object.
 7. Thecomputer readable medium of claim 2, further including instructionsexecutable to: reduce, when the combined first and second risk valuesexceeds the position risk value, at least one of the first quantity to areduced first quantity prior to submitting the first order, and thesecond quantity to a reduced second quantity prior to submitting thefirst order and prior to submitting the second order.
 8. The computerreadable medium of claim 2, further including instructions executableto: reduce, when the combined first and second risk values exceeds theposition risk value, an order quantity associated with the firstquantity for the first tradeable object and the second quantity for thesecond tradeable object, wherein the reduction is determined accordingto a percentage reduction.
 9. The computer readable medium of claim 8,wherein the percentage reduction is a user specified value.
 10. Thecomputer readable medium of claim 8, wherein the percentage reduction isidentified as part of the trading strategy definition.
 11. The computerreadable medium of claim 8, further including instructions executableto: generate a trading strategy notification in response to a reductionin the order quantity associated with the first quantity for the firsttradeable object and the second quantity for the second tradeableobject.
 12. The computer readable medium of claim 8, wherein reducingthe order quantity is an action implemented at a client device.
 13. Thecomputer readable medium of claim 8, wherein reducing the order quantityis an automated action implemented at the server side device.
 14. Thecomputer readable medium of claim 2, wherein the server side device is agateway in communication with the first electronic exchange and thesecond electronic exchange as part of a trading network.
 15. Thecomputer readable medium of claim 2, wherein the server side device isin communication with a plurality of client devices implementing atrading application.
 16. The computer readable medium of claim 2,wherein the trading strategy definition is one of a plurality of tradingstrategy definitions received by the server side device, and where eachof the plurality of trading strategy definitions is associated with oneof a plurality of position risk values.